Swedish state pension fund AP4, with $40 billion under management, wants to increase its activism.

“I strongly believe if you can be an active long term owner you can enhance your returns”, chief executive Mats Andersson told Financial News. “I think it is a matter of engaging with companies if you want to make a difference, and having a dialogue and not a fight with a company”.

AP4 is one of five so-called “buffer funds” in the Swedish national pension system, which manage and invest capital so they can provide top-ups when the system's outgoings exceed contributions from Swedish taxpayers. It has fund capital of Skr 260 billion ($39.56 billion) as of the end of 2013, making it the second-largest of these funds.

Last week AP4, a shareholder in Scania, declined Volkswagen’s offer of Skr200 per share, saying not only that the offer was too low, but also that it would prefer to see Scania remain an independent firm.

Andersson said that AP4 will take a similarly interventionist line, where warranted, in future decisions. “It is part of the evolution of managing a pension fund, you need to be more engaged,” he said.

The fund has existing investments in engagement funds in Japan, Sweden and Europe, and Andersson said it is looking into similar investments elsewhere, particularly in the US. “If there are others I would be more than happy to look into them”, he said.

Hunting returns is of increasing importance to country's pension system, where net flows have been negative since 2009, as the “baby boomer” generation retires. The Swedish Pensions Agency expects net outflows to continue year-on-year until the mid-2040s, meaning the buffer funds will be increasingly relied on to top up the national pension system.

AP4 has a strong focus on equities, with 34% of the fund invested in global equities at the end of last year, plus 12% invested in Swedish equities. This helped drive returns of 16.5% in 2013.

It has made a similarly strong start to 2014, said Andersson, with its weighting towards equities “more or less” the same.

What makes the fund unique, he said, “is we can be truly long term, we can stand volatility, we don’t shy away from it”. Returns for the fund are measured over decades — it has an annualised performance target of 4.5% over each 10-year period, as mandated by the Swedish parliament.

AP4 is currently restricted by investment rules laid out by the Swedish Parliament, which define exposure levels to each asset class. One such rule means that the fund must invest at least 30% of its portfolio in low-risk debt securities. In the fund’s annual report Andersson wrote that this bond portfolio, which returned just below zero, “had an inhibitory effect” on the fund’s performance.

But a proposed relaxation of the rules for “buffer funds” could enhance returns and lower costs, he said. “I think if we can have a freer mandate in terms of alternatives and non-listed stuff… we can increase the returns over time.”

Andersson is less keen on a proposal currently making its way through the Swedish judicial system, which would streamline the pension fund system, and cut the number of buffer funds.

“I believe it will cost more to close the funds,” he said. “How will you improve and lower the costs compared with what we have today? That question is unanswered.”